The evidence on international capital immobility is extensive, including the lack of international portfolio diversification, real interest differentials across countries, and the high correlation between domestic savings and investment. We develop a model with asymmetric information between countries that helps rationalize all the above observations and then examine the implications of this model for optimal domestic tax policy. Without asymmetric information, past work showed that small open economies should not impose corporate income taxes. With asymmetric information, the optimal policy instead involves government subsidies to capital imports. Some omitted factors that argue against subsidizing capital imports are explored briefly.

The double taxation of corporate income should discourage firms from incorporating. We investigate the extent to which the aggregate allocation of assets and taxable income in the United States between corporate and noncorporate firms responds to the size of this tax distortion during the period 1959–1986. In theory, profitable firms should shift out of the corporate sector when the tax distortion is large, and conversely for firms with tax losses. Our empirical results provide strong support for these forecasts, and imply that the resulting excess burden equals 16 percent of business tax revenue.

ABSTRACT The double taxation of corporate income should discourage firms from incorporating. We investigate the extent to which the aggregate allocation of assets and taxable income in the United States between corporate and noncorporate firms responds to the size of this tax distortion during the period 1959–1986. In theory, profitable firms should shift out of the corporate sector when the tax distortion is large, and conversely for firms with tax losses. Our empirical results provide strong support for these forecasts, and imply that the resulting excess burden equals 16 percent of business tax revenue.

The double taxation of corporate income should discourage firms from incorporating. The authors investigate the extent to which the aggregate allocation of assets and taxable income in the United States between corporate and noncorporate firms responds to the size of this tax distortion during the period 1959-86. In theory, profitable firms should shift out of the corporate sector when the tax distortion is large, and conversely for firms with tax losses. The authors' empirical results provide strong support for these forecasts and imply that the resulting excess burden equals 16 percent of business tax revenue.

[This paper examines how corporate taxation of multijurisdictional firms using formula apportionment affects the incentives faced by individual firms and individual states. Under formula apportionment, a firm's tax payments to a given state depend on its total profits nationally (or internationally) times an average of the fractions of the firm's total property, payroll, and sales located in that state. This apportionment of a firm's total profits among states, based on three separate factors, in effect creates three separate taxes, each with complicated incentive effects. A large part of our analysis is concerned with the component of the tax tied to the allocation of property. Under this tax, price distortions differ in general among firms within the same state, creating incentives for firms producing in different states to merge their operations. State tax policies are also affected by this apportionment formula: states choose inefficiently low tax rates and are encouraged to shift to direct taxation of property. The component of the tax based on payroll creates many similar incentives. With this tax, however, the marger of firms producing different goods is discouraged.When a sales component to the tax is added, there are incentives for the cross-hauling of output, with production in low tax rates states sold in high tax rate states, and conversely. None of the above distortions are created when the corporate tax uses separate accounting to divide a firm's profits among states. The final section presents an alternative apportionment formula which retains the administrative advantages of existing law, yet creates the same incentives as separate accounting as long as there are no economic profits.]

Amid the academic debate about whether a tax based on consumption or income is superior, it has long been recognized that the U.S. federal tax system is in reality a hybrid of an income and consumption tax, with some elements that do not fit naturally into either system. In recent decades, tax-law changes that altered the nature of the hybrid were generally not discussed as part of a plan to establish either a pure income tax or a pure consumption tax, but as attempts to establish a “level playing field” or to improve “incentives to save.” As of 2003, the outline of an explicit plan to move toward a consumption tax is emerging. Under the original Bush administration proposals in 2003, dividends would become taxexempt if corporate tax had been paid on the earnings supporting the dividends, and a new tax-exempt Lifetime Savings Account, with no restrictions on use, would be created. The proposed expansion of tax-exempt savings accounts was not passed, although it will likely be reintroduced in some form. What did become law were two provisions to expand expensing of qualified property: (i) an increase in the fraction of equipment investment that can be immediately written off from 30 percent (which became law in 2002) to 50 percent, and (ii) an increase through 2005 of the limit on the expensing of new depreciable assets by small businesses allowed under IRC Section 179. The 2003 tax law also reduced the rate of tax on dividends and realized capital gains received by an individual shareholder to be no more than 15 percent, compared to a top rate on “ordinary” income of 35 percent. The acceleration of depreciation, the reduction of personal tax on dividends, and an expansion of tax-favored savings accounts can be seen as part of a strategy to shift the tax base from income to consumption. If the ultimate destination of this set of tax reforms is a consumption tax base, then the most glaring omission from the discussion to date concerns interest deductibility. The continuation of interest deductibility, in spite of other moves toward a consumption tax base, raises two issues. The first is that interest deductibility plus expensing for businesses, plus exemption of financial returns of individuals produces not a zero tax on capital income, as under a consumption tax, but rather a subsidy. The second is that this tax structure allows a range of tax arbitrage opportunities among individuals and across corporations and individuals. For example, even under pre-2002 tax law, when high-tax-bracket investors borrowed from those in low (or zero) tax brackets they generated an arbitrage gain equal to the difference between the tax rates. Reducing the tax rate on interest income, but not interest deductions, to zero vastly expands this opportunity. These tax arbitrage opportunities reduce tax revenue without necessarily providing * Gordon: Department of Economics, University of California–San Diego, 9500 Gilman Drive, La Jolla, CA 92093 (e-mail: [email protected]); Kalambokidis: Department of Applied Economics, University of Minnesota, 217f Classroom-Office Building, 1994 Buford Avenue, St. Paul, MN 55108-6040 (e-mail: [email protected]); Rohaly: Urban Institute, 2100 M Street N.W., Washington, DC 20037 (e-mail: [email protected]); Slemrod: Office of Tax Policy Research, University of Michigan, 701 Tappan Street, Rm. A2120, Ann Arbor, MI 48109-1234 (e-mail: [email protected]). 1 The Tax Reform Act of 1986, which in many ways moved the definition of taxable income closer to economic income, may be an exception (see Charles E. McLure, Jr., 1988). 2 Jonathan Weisman (2003) reported that the Bush administration was debating whether to push “a plan for stealth tax reform in ‘five easy pieces’—lower marginal income tax rates, including capital gains tax rates; eliminate taxes on dividends; accelerate the speed with which businesses can write investment expenses off their tax bills [ultimately to the point of 100 percent first-year expensing of business capital investment]; expand the Roth individual retirement account to all personal saving; and exclude export and other foreign trade income of American companies from taxation.”

To what degree do economists disagree about key economic questions? To provide evidence, we make use of the responses to a series of questions posed to a distinguished panel of economists put together by the Chicago School of Business. Based on our analysis, we find a broad consensus on these many different economic issues, particularly when the past economic literature on the question is large. Any differences are unrelated to observable characteristics of the Panel members, other than men being slightly more likely to express an opinion. These differences are idiosyncratic, with no support for liberal vs. conservative camps.